In March 2013, the National Bank of Serbia (NBS) played host to the first meeting of the 'Belgrade Initiative', intended to improve coordination between the Serbian authorities and the home supervisors of foreign banks operating in the country. This is the local mirror of the Vienna Initiative instituted for the central and eastern Europe (CEE) region in 2009 in an attempt to stop any sharp outflows of western European bank capital and liquidity.
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That coordination is particularly important given the significant role of Greek-owned banks in the country, with a market share of assets at about 16% – or closer to 20% if AIK Banka, in which Greece’s Piraeus owns a 20% stake, is included. The four largest Greek banking groups are all undergoing recapitalisation and restructuring due to the massive losses in their home market.
“We are monitoring the situation closely, but the Greek bank subsidiaries in Serbia are generally well-capitalised and are required to maintain their own capital adequacy here in Serbia,” says finance minister Mladjan Dinkic.
However, there was little sign of cross-border consultation a month after the NBS meeting, when the Greek authorities terminated plans for a merger between Eurobank and National Bank of Greece (NBG), and decided to proceed with separate recapitalisations of the two banks instead. Eurobank owns the largest Greek subsidiary in Serbia and, together with NBG’s Vojvodjanska Banka, the combined group would have represented about 10% of Serbian banking assets.
“Whatever happens to the largest Greek banks will have some impact here, especially if there are mergers,” says Mr Dinkic. "When the [NBG/Eurobank] deal was originally announced [in October 2012], a representative from Eurobank told us that a merger of the two banks in Serbia would follow about a year after the parent banks completed their merger. Since then, there has been no consultation by the EU over the future of the Greek banks."
Economic pressures
Among the Greek banks, only Eurobank has a sustained track record of profitability in Serbia in recent years. Agricultural Bank of Greece (ATE) already tendered for sale its 20% of AIK Banka at the start of 2012. ATE itself was bought by Greek peer Piraeus in July 2012 as part of the clean-up of the system, and there has been no indication that this changes the plan to sell the AIK stake.
Greek-owned banks are far from the only ones to face profound challenges in a market where 32 banks are competing for a pool of loans that grew just 1% in 2012. The state-owned banking sector is also struggling, with two banks – Agrobanka and Razvojna Banka Vojvodine – placed into administration in the past two years. About half of the banks have a market share of less than 2% each, and executives at the largest banks complain that many smaller players engage in loan and deposit price competition to a point that is unprofitable. Moreover, the macroeconomic environment has not been helpful.
“The past year has been tough due to the human element of election uncertainty during the first half of 2012, and the drought that hit the agricultural sector, which accounts for a large part of Serbian exports. The economy shrank and inflation spiked because food accounts for about 30% to 40% of the consumer prices basket,” says Slavko Caric, chief executive of Erste Bank in Serbia.
Once in office, the new government responded quickly to the downturn with subsidised lending programmes, and additional support came from multilaterals including the European Investment Bank (EIB) and European Bank for Reconstruction and Development (EBRD). But these measures could not stem asset quality problems, especially among small and medium-sized enterprises (SMEs) that do not have deep capital cushions to protect them against falling revenues.
“Non-performing loan [NPL] rates among SMEs are about 20%. The level of NPLs is falling, but mainly due to write-offs rather than improving asset quality. There is a lack of demand from good quality clients, and competition for those clients is extremely high. Infrastructure, agro-industry and export-oriented SMEs offer the best prospects,” says Ivica Smolic, the chief executive of state-owned Komercijalna Banka, which is the country’s second largest by assets.
Exits and entrances
The pressure on the smallest banks creates an opportunity for larger players to lead the consolidation process. So far, the government has used postal savings bank Poštanska štedionica to take over the assets and liabilities of defunct state banks. State-owned Privredna Banka Beograd is up for sale, and a number of foreign parents that have needed government-backed recapitalisations – including Slovenia’s Nova Ljubljanska Banka and Austria’s Hypo Alpe Adria – may be required to exit their Serbian subsidiaries.
One deal is already under way. Belgium’s KBC has agreed to sell its licence and capital in Serbia to Norwegian telecom company Telenor, while the local subsidiary of France’s Société Générale is buying most of the assets and liabilities.
“We have grown the bank organically during its 36 years in Serbia, but in this market where some of the players must exit, we analysed the situation and decided that it was worth being a consolidator, if the deal is interesting from a commercial and financial viewpoint,” says Frederic Coin, the president of Société Générale in Serbia.
KBC had been attempting to sell the bank for several years, and was thus willing to undertake an unusual deal by selling the retail and SME client portfolios that Société Générale wanted, while retaining large client relationships directly at the KBC headquarters level.
The Telenor aspect of the deal was even more innovative. In addition to providing payment services in its Nordic home markets over the past decade or more, Telenor has experimented with branchless microfinance in Pakistan. It controls one of the largest mobile networks in Serbia, and chose this as a manageable market in which to launch its first mobile banking project in emerging Europe.
“In Pakistan, bank penetration is running at only 10% to 15%, while in the Nordics we are looking at mobiles as cash or bank card substitutes. Serbia represents somewhere in between those two extremes in terms of banking sector maturity. It is a small market, but we have good brand recognition there, and we believe there is an opportunity to take a position in developing next-generation consumer banking products,” says Abraham Foss, head of financial services at Telenor.
Despite the crowded market, Mr Foss believes Telenor can find a way in through its mobile customer base, because most of the existing banks operate a broad spectrum of products. By contrast, Telenor can develop a focused digital interface designed purely for retail customers, making use of the efficient high-volume, low-cost model built from serving 150 million telecom customers worldwide.
IFI support
For the banks that remain, a further challenge is the funding position. The sector as a whole has a loan-to-deposit ratio of about 125%, and in the absence of a local corporate bond market, most foreign banks are dependent on parent funding for at least some of their business. The exception is Italian-owned Banca Intesa, the country’s largest bank, which enjoyed a 20% rise in deposits in 2012 and has a loan-to-deposit ratio of less than 100%.
“Our leadership position in the Serbian deposit market provides us with a stable and sustainable foundation for further growth. As long as credit growth in Serbia remains subdued, funding needs should be covered by local sources accompanied by financing coming from leading international financial institutions [IFIs],” says Draginja Djuric, chief executive of Banca Intesa Beograd.
For smaller banks, the multilateral source of funding is essential. Regional lender Cacanska banka, based in the south-western town of Cacak, is 25% owned by the EBRD, and 20% by the International Finance Corporation. Deputy chief executive Aleksander Calovic says the bank also has credit lines from the EIB, Dutch development bank FMO and German development bank KfW.
“Loans from the development banks do not carry any reserve requirements from the NBS, whereas there is a 30% reserve requirement on deposits. So IFI financing enables us to compete on price,” says Mr Calovic.
EU convergence
In an environment of stagnant loan growth and tightening margins, banks will also need to focus on non-interest income, which currently accounts for only a small percentage of the total. Ms Djuric says Banca Intesa has already sought to diversify its revenue streams through affluent client services and cash management for corporate customers.
“With Serbia moving forward on its road to EU integration and the improvement of trade relations across the region, we also see great potential in the further development of transaction banking,” she says.
It is the EU membership process that provides the most significant bright spot, thanks to the impetus provided by the new Serbian government. A treaty with Kosovo was signed in April 2013, paving the way for the EU to commit to beginning entry negotiations with Serbia no later than January 2014. Société Générale's Mr Coin says historic experience elsewhere in CEE shows that the period of negotiations often corresponds to the fastest rate of economic and business environment convergence. EU-oriented exporters are likely to be the most attractive banking segment in Serbia in the coming months.
